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Major challenges in the early-stage investment landscape

Highlighting several challenges that early-stage investing activities face in India, such as finding worthy ideas and companies, policy barriers from the government, high taxation, lack of brand-building skills, etc. 

The rise of the startup industry, and technological innovations, leading to a burgeoning entrepreneurial landscape in the country has contributed to the popularization and growth of early-stage financing in the country. The current situation of global competitiveness has also pushed the industrial sector to improve the level of quality for products, while minimizing costs using latest technological skills. The goal for most startups today is to secure adequate finance aided by technology to produce innovative products that are successful and profitable in the present market condition. Unfortunately, our country lacks on both fronts.

The startup boom, aided by rapid globalization in the last decade has led to the expeditious growth in the scale of seed funding activities and private equity investments in the country. Under significant initiatives such as Start Up India and Digital India, the government is promoting growth in capacity utilization of available and acquired resources and entrepreneurship development, by liberalizing norms pertaining to funding of startups. However, there are still several challenges that early-stage investing activities face in India, such as finding worthy ideas and companies, policy barriers from the government, high taxation, lack of brand-building skills, etc.

• Finding great companies

One of the major limitations to early-stage financing in India is the lack of innovative ideas in the market. For every business venture an investor funds, there are between 100 to 400 other companies that pitch ideas to them. Correspondingly, there is the need to maintain a steady deal flow in funding companies, which is not always possible while competing on price and stage with other investors. Investors must scrutinize each aspect of a company through a fine lens to find the right team with the potential to identify opportunities and act on them.

• Portfolio growth and support

The current investment landscape causes a lot of unhealthy growth among companies that investors must resist. Funding a company with an off-the-chart growth may not be as reliable as it is alluring. Companies that rise too quickly, can plummet just as fast, incurring heavy losses for investors. Secondly, it is important to find ways to grow a startup and achieve market dominance, without over-spending. The rising trend today among most big startups is to throw good money at advertising and hijack the media to build their brand. While several entrepreneurs are attracted to that route, the challenge is to build a brand the old-fashioned way – by creating a differentiated product that thrives through word of mouth. Another significant challenge faced by early stage investors is finding the right set of passionate resources to support portfolio growth at early stages, and the right team that can identify problems and effect timely course correction.

• Finding exits

The limited avenues for exit impede the growth of a venture considerably, hindering the process of possible transfer of ownership. In several cases, investors are unable to assess the right time to exit the venture and end up losing the value on their investment. Long-term investment in a company that does not grow results in losses to the investor, the company, and other stakeholders. It is imperative to identify which investments have the potential to yield desired growth and profit in the market for the enterprise, and which do not.

• Policy issues

One of the major policy issues impeding early stage investment in India is the lack of access to institutionalized capital. The dearth of capital sources such as insurance companies, pension funds, etc. is a result of the absence of appropriate policy in place to support risk capital funding, and as an extension, entrepreneurship in the country. In the absence of such necessary policies, early stage funds are restricted to raising capital from family offices, etc., thus blocking the steady flow of funds and investment opportunities.

1. Capital gains tax: While public market investments and real estate investments are not exempt from long-term capital gain tax under certain circumstances, private equity is charged a high amount of capital gains tax on exit. Moreover, foreign investors investing in Indian VC funds are allowed tax exemptions depending on the sectors that they invest in. Indian investors dealing in rupees, however, are subjected to high capital gains tax in India. This also acts as a key barrier to exit for financiers looking to disinvest from a venture.

2. Archaic regulations inhibiting innovation: Outdated regulations and policies on technological innovation inhibit entrepreneurship and negatively impact tech-based startups. As a result of such rigid regulatory policies, many ground-breaking technological innovations and investments end up leaving India for western countries that nurture such developments. Thus, there is an urgent necessity to update policies to catch up with innovation and curb the high amount of brain drain from the country.

• Lack of consumer specialization: The current startup landscape lacks a much-needed consumer specialization to build an Indian brand and survive in the market. Many entrepreneurs disconnected from the market and ground realities, often find it hard to understand Indian consumers. A large section of Indian investment ecosystem focuses on technology and innovative western business models with limited understanding of brand creation which gives rise to companies that fail to build their own loyal following, thus relying on discounting and burning cash to retain customers. 

Meeting between startup and Early Age Investors 
Meeting between startup and Early Age Investors 
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A doyenne in the field of early stage investment and start-up incubation, Dr. Apoorv Ranjan Sharma is the Co-Founder of Venture Catalysts, India’s first Seed Investment & Innovation platform. In his role, he is responsible for driving the strategic planning and overseeing the overall functioning of the organisation. Dr. Apoorv holds an Electrical Engineering degree from Harcourt Butler Technological Institute, Kanpur, and an MBA from Asia Pacific Institute of Management, New Delhi along with a Diploma in Mentoring Start-ups from University of California, Berkeley. He also holds a PhD in Management, Role of Business Incubators in Economic Growth of India, and is one of the very few professionals with academic certification in Incubation and Early Stage Investment currently active in the start-up field. Having been involved in early stage investment since 2002, Dr. Apoorv has a series of professional accomplishments to his name. He was the Project Manager of the JSS Technology Incubator/JSS SEED Fund, which was the first Government-sponsored SEED Fund in India. He then took over the task of establishing Amity Innovation Incubator and was responsible for developing its Amity Family Office Fund as its General Manager. Dr. Apoorv has also led the Indian Angel Network (IAN), India’s first and largest angel network at present, as the Vice President of its Western Region Investments and Technology Incubator. He has also been involved as the Executive Vice President of VentureNursery, a start-up accelerator. Venture Catalysts, his latest venture, distils his years of experience and proficiency with various fundamental start-up related concerns into a unique, integrated platform providing solutions to all early stage start-up requirements. Having been associated with the Indian start-up industry since it came into being, Dr. Apoorv has gained vital insights and practical, in-depth understanding of the Indian start-up ecosystem. He has led several investment drives into becoming thriving ventures, and has a portfolio including more than 10 companies with more than 100 crore valuation. Moreover, in his capacity as a start-up mentor, he has also guided several investee companies into securing angel as well as VC funding. Dr. Apoorv has, over his career, fostered several close connections within the start-up industry, which he leverages in order to facilitate growth and add value for all key stakeholders in an investee venture. His aim is to lead Venture Catalysts as the foremost single-point start-up solutions platform by revitalising and revolutionising the early stage investment industry backed by his strong industry connections and sourcing capability. Dr. Apoorv is planning to onboard seasoned angels as well as HNIs onto the VCats platform, and will be looking to raise INR 100 crore from multiple investors to drive 15-20 annual early stage investments.

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